News of Note
TPine – Federal Court of Appeal indicates that it is unclear whether revised s. 152(9) precludes CRA from advancing a further argument based on a different transaction
Email this ContentThe original Crown Reply had stated that the Minister had assessed TPine’s return to disallow a CCA deduction on the basis that the Class 10 and 16 assets in question were included in the same equipment that TPine had sold and for which it had claimed a cost-of-goods sold deduction. TPine appealed the Tax Court’s allowance of an amendment to the Reply (which the Crown sought to justify under s. 152(9)) to include the alternative basis for the assessment that, if TPine was successful in challenging the CCA denial, the TPine cost-of-goods-sold deduction should be reduced by an equivalent amount.
Webb JA indicated that in interpreting the previous version of s. 152(9), the Federal Court of Appeal “has not allowed the Minister to raise a new argument based on a transaction that did not form the basis on which a taxpayer was assessed” (para. 85). Here, that test was not a barrier to the new pleaded basis of assessment. The central allegation of the Minister was that it was “the same equipment that resulted in the CCA claim and in the deduction for the cost of goods sold” (para. 86). Thus the two alternate assessment bases were joined at the hip: if TPine had sold those assets, it followed “that the claim for CCA was a valid claim and no amount should have been claimed for the cost of goods sold” (para. 88); and if it had not sold the assets, it followed that the cost-of-goods sold deduction should be reduced.
Since s. 152(9) permitted the new pleading even under its more restrictive previous version as judicially interpreted, the same result should follow under the current version of s. 152(9) that applied to this amendment. However, in commenting on the current version of s. 152(9), Webb JA stated (at para. 90):
The principles that the Minister cannot appeal an assessment and the Minister cannot reassess beyond the expiration of the normal reassessment period are still valid principles that would need to be taken into account in determining what alternative basis or argument the Minister may advance. In interpreting and applying the previous version of subsection 152(9) of the Act, this Court has also limited an alternative argument to the same transaction that is in dispute. It is not clear how the amendments would alter this principle.
Neal Armstrong. Summaries of TPine Leasing Capital Corporation v. Canada, 2024 FCA 83 under s. 152(4)(a)(i), s. 152(9) and s. 152(1).
CRA confirms that “meetings” in ss. 8(13)(a)(ii) and 18(12)(a)(ii) refers only to “face to face encounters”
S. 18(12)(a)(ii) provides that no expenses related to a work space in the home can be deducted from income from a business unless the work space is used exclusively for the purpose of earning income from the business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business (unless, per s. 18(12)(a)(i), the home work space is the individual’s principal place of business). S. 8(13)(a)(ii) provides a parallel restriction regarding expenses related to a home work space which otherwise were deductible by an employee under s. 8(1)(f) or (i).
Regarding the impact of meeting clients in a home virtually, CRA confirmed its “long-standing position” that the term “meeting”, as used in both provisions “includes only face to face encounters” rather than virtual meetings. However, depending on the facts, the work space expenses might satisfy s. 8(13)(a)(ii) or 18(12)(a)(ii), regarding the work space being the principal place of business or of performance of the employment duties.
Neal Armstrong. Summary of 16 August 2022 Roundtable, 2022-0946251C6 under s. 8(13)(a)(ii).
CRA indicates that capital gains crystallization transactions are not per se GAARable
Regarding transactions (including non-arm’s length transactions) to crystalize accrued capital gains prior to June 25, 2024, CRA, after referring to the proposed amendments to s. 245, stated:
[T]he 2024 Federal Budget does not contain any limits on the eligibility of capital gains for the current inclusion rate where such gains are realized prior to June 25, 2024 and … the delay in the implementation of the increased inclusion rate is a deliberate policy choice. In light of this … where a taxpayer crystallizes an accrued capital gain prior to the increase in the capital gains inclusion rate, the GAAR would generally not apply to redetermine the inclusion rate in respect of the crystallized capital gain.
However, CRA indicated that GAAR scrutiny might be merited where tax benefits were engaged in addition to avoiding the increased inclusion rate, for example, surplus-stripping transactions.
Neal Armstrong. Summary of 29 April 2024 External T.I. 2024-1016011E5 under s. 245(4).
Income Tax Severed Letters 1 May 2024
This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Marine Atlantic – Tax Court substantially increases a cost award to the taxpayer to punish for “improper” and “offensive” conduct of Crown counsel
The Appellant had complete success at trial regarding the ITC methodology it used for its ferry operation. D’Arcy J now made a costs award to the Appellant (of 60% of its counsel’s fees of $1.3 million, plus disbursements and a gross-up for unrecoverable HST) that reflected a substantial enhancement for the improper conduct of Crown counsel.
First, the Crown had resiled from an agreement to follow the decision on two relevant issues in BC Ferries which, when later decided in 2014, favoured the Appellant’s position. The Crown did not agree to be bound by those findings until the eve of trial – and this delay in following BC Ferries caused the Appellant to incur substantial costs.
Second, the Crown had improperly sought to introduce evidence of a CRA auditor through an affidavit rather than through court testimony. Furthermore, the use of the affidavit in this instance had been found by D’Arcy J in his prior decision to be “trial by ambush” and resulted in “trial days being thrown away.”
Third, the Crown submission on costs challenged the above “trial by ambush” finding. D’Arcy J stated:
This is improper; a party should never use cost submissions to question a finding made by the Court in the related appeal.
Further, the Respondent’s submissions indicate that he is prepared to engage in similar offensive behaviour in the future.
Similarly, the Crown submissions improperly and falsely challenged D'Arcy J’s findings that CRA had inappropriately threatened to impose gross negligence penalties on the Appellant.
Neal Armstrong. Summary of Marine Atlantic Inc. v. The King, 2024 TCC 51 under Rule 147(3).
Autonun – Court of Quebec rejects an ARQ request to change the sales tax provision on which its assessment rested
Three weeks before trial, the ARQ auditor concluded that Autonun should have been assessed pursuant to QSTA s. 318 (similar to ETA s. 182, regarding amounts forfeited to a taxable supplier being deemed to be inclusive of tax), rather than pursuant to QSTA s. 92 (similar to ETA s. 168(9), regarding deposits not being taxable consideration until applied as consideration) on which the assessment of Autonun had been based. One week later, the ARQ sought leave of Autonun to amend its pleading to provide that the assessment rested on s. 318 rather than s. 92, which Autonun refused.
Before rejecting the ARQ’s request to make such amendment, Bergeron JCQ first noted that TAA s. 95.2 (similar to ITA s. 152(9) and ETA s. 298(6.1)) on its face gave the ARQ an unfettered right to advance an alternative basis for its assessment. However, he found that where the amendment request was made in the context of a Quebec court proceeding, it was required to satisfy the Quebec Code of Civil Procedure, including section 206 thereof. Section 206 provides that there can be such an amendment “provided doing so does not delay the proceeding and is not contrary to the interests of justice” but that “the amendment of a pleading must not result in an entirely new application having no connection with the original one.”
Bergeron JCQ found that none of the quoted tests were satisfied: there would be significant delays including fresh discovery of the ARQ; the ARQ had failed to explain to Autonun why it had changed the assessment’s basis (so that Autonun would be required to “navigate blindly, in thick fog”; and (regarding the third test) there was indeed a new application given that the auditor had affirmed “that the foundations underlying QSTA sections 92 and 318 are conceptually different and lead to different results”.
Neal Armstrong. Summary of Autonum, Solutions de financement aux consommateurs inc. v. Agence du revenu du Québec, 2024 QCCQ 1195 under ITA s. 152(9).
We have translated 7 more CRA interpretations
We have translated a CRA interpretation released last week and a further 6 CRA interpretations released in January of 2002. Their descriptors and links appear below.
These are additions to our set of 2,819 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 22 ¼ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Madison Pacific – Tax Court of Canada indicates that the taxpayer’s pursuing a no “avoidance transaction” argument should increase its costs
Madison Pacific (2023 TCC 180) held that there was a GAAR abuse of s. 111(4) when two unrelated companies acted in concert to acquire 46.6% of the voting rights and 92.8% of the taxpayer’s equity (through being issued inter alia Class C non-voting shares) so as to access the taxpayer’s losses.
Graham J now granted the Crown’s request for costs of $408,834, being 35% of its actual legal costs, plus disbursements. Of the factors listed in Rule 147(3), a factor that in particular argued for increased costs was the taxpayer’s failure to concede until oral argument that there was an avoidance purpose for the creation of Class C non-voting shares. Graham J stated:
[W]here the weakness of the evidence in support of an argument are as apparent as they were in this case, it is appropriate to deal with the pursuit of that argument through costs. Significant trial time (in particular, significant time spent preparing for and conducting cross-examinations) could have been saved had the Appellant conceded this issue up front.
Neal Armstrong. Summary of Madison Pacific Properties Inc. v. The King, 2024 TCC 47 under Rule 147(3).
CRA finds it reasonable to impute an inter-spousal gift or loan on spouses’ property purchase based on how the sales proceeds were agreed to be shared
Two Canadian-resident spouses (A and B) acquired a cottage as co-owners for $400,000. The purchase price was funded with a $100,000 cash payment made by A, and as to $300,000 with the proceeds of a mortgage loan for which they were solidarily liable.
In Situation 1, their co-ownership agreement did not specify their respective co-ownership interests, so that each was presumed under the Civil Code to own 50% of the cottage. On a subsequent sale of the cottage for $700,000, they shared those proceeds equally. CRA indicated that it was reasonable to assume that the $100,000 initial payment was a gift by A to B as to $50,000. The ACB of the interest of each in the cottage would be $200,000. On the subsequent sale, s. 74.2(1) would apply to attribute ¼ (i.e., $50,000/$200,000) of B’s taxable capital gain to A.
Situation 2 was the same, except that the co-ownership agreement specified that the first $100,000 of any sales proceeds plus a predetermined return was to be paid to A, with the balance split on a 50-50 basis. Here, CRA assumed that the initial payment by A represented a loan to B as to ½ and that the specified return represented interest on that loan. Again, s. 74.2(1) generally would apply to attribute ¼ of B’s taxable capital gain to A, given that the requirements of s. 74.5(2)(c) for timely payment of interest on that loan would not have been satisfied.
Neal Armstrong. Summary of 7 October 2021 Roundtable, 2021-0908201C6 F under s. 74.2(1).
CRA confirms its historical position on the meaning of “credited”
In response to brief questions as to how a Canadian corporation may recover Part XIII tax that it has withheld on a dividend cheque issued to a US resident that then is returned, CRA responded that this was a question that could be specifically addressed with more complete facts, and confirmed its position in IC 77-16R4, May 11, 1992 (Archived), on “credited”:
5. The words "credits" and "credited" cover any situation where a resident of Canada or, in certain cases, a non-resident (see 8 below) has set aside and made unconditionally available to the non-resident creditor an amount due to the non-resident such as where (a) a tenant or agent deposits rents in a bank account on behalf of a non-resident landlord; (b) a bank credits interest to the savings account of a non-resident; (c) an insurance or trust company deposits a pension or annuity payment in the bank account of a non-resident; or (d) the amount due is applied by the resident (or deemed resident) against an amount owing by the non-resident. …
Neal Armstrong. Summary of 19 November 2019 Roundtable, 2019-0829611C6 under s. 212(2).
Neal H. Armstrong editor and contributor